The first electronic stock marketA NASDAQ case study

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Page 4: Market model

Nasdaq operates a computer screen-based market model: market participants, both registered Market Makers and ECNs (Electronic Communications Networks) communicate through its private network of computer links. Indeed, this network was one of the world’s first business to business intranets. This network broadcasts trading information to over 7,000 terminals at 600 market making firms worldwide. The system regularly handles 3 billion shares traded per day and can handle trading up to 4 billion shares in one day – 3,000 transactions per second.

Nasdaq Market Makers are member firms that buy and sell Nasdaq securities at prices they display on the Nasdaq computer system. They trade for their own account and risk, as well as on behalf of their customers. More than 600 member firms act as Nasdaq Market Makers. They use their own capital to buy and maintain an inventory of company shares, which they can use to fulfil an order for a customer. No company can list on Nasdaq without having at least two Market Makers agree to “make a market” in their shares. This means that when requested, they have to quote to buy and sell that stock.

Market Makers will buy and sell shares at different prices. This makes the market competitive and very liquid. Market Makers must quote two prices – their buying price and their selling price, the difference between the two is known as the Market Maker spread – effectively this is the market makers’ profit for undertaking the trading of those securities. They must report any trade they have made electronically within 90 seconds. Services offered by Market Makers include:

generating research reports on the shares they trade

matching buyers and sellers

advising investors on opportunities to buy new and secondhand shares and on other investment possibilities.

Other market participants include Electronic Communications Networks (ECNs). These are trading systems that bring additional customer orders to the market. As Nasdaq market participants, ECNs display either one-sided or two-sided quotes, which reflect actual orders. ECNs provide institutions and Market Makers with an anonymous way to enter orders for stock into the marketplace. This anonymity increases genuine competition within the market and ensures investors get the best price available.